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When It Comes to the VAT Base, the Freedom to Narrow Is Best Ignored

August 31, 2018 in Economics

By Ryan Bourne

Ryan Bourne

The temptation is near irresistible. Brexiteers want
“wins” from freshly repatriated policy freedoms. One
tax-related power we get back upon EU exit is determining the
structure of VAT.

Those dastardly Brussels menaces have long constrained
governments’ desires to slash rates on certain products.
Freed from their obstinance, some Leavers want Philip Hammond to
deliver popular rate cuts on products such as women’s
sanitary products and domestic fuel.

The Chancellor, in this case, must resist Brexiteer demands.
Further complications of our dysfunctional tax code should be no
Brexit priority. Carve-outs of products from the VAT base will jack
up compliance and administrative burdens, distort consumer choices,
necessitate higher, more damaging taxes elsewhere and deliver
relief for its supposed beneficiaries in a maddeningly inefficient
manner. Worse, it will open the floodgates to a baying mob of
vested interests encircling the Treasury.

During the referendum campaign, Vote Leave advocated reducing
the VAT rate on household gas and electricity to zero. Brexiteers
jumped too upon the bandwagon of zero-rating the “tampon
tax” – the 5pc VAT currently imposed on sanitary products.
The EU has since ceded this, albeit kicking the can for
countries’ ability to zero-rate women’s sanitary
products to 2022.

UKIP, laughably, pledged last year to scrap VAT on fish and
chips. A long-running holiday industry campaign wants VAT on
domestic tourism to be jettisoned. Now, with this ever-loudening
hum of demands and buoyed by rhetoric against online corporations,
the property consultancy Colliers International has suggested a
two-tier VAT system across business types, with a 15pc rate for
purchases in stores and a much higher 22.5pc VAT for online
transactions.

No wonder all sense an opportunity. VAT is one of very few taxes
almost entirely overseen by Brussels. EU rules make VAT compulsory,
set a minimum main rate of 15pc, and restrict us from expanding the
list of zero-rated items. The rationale is to stop back-door
protectionism through zero-rating items produced at home and
applying full rating to types of goods imported. After Brexit, we
are at liberty to change all that.

But change we must not. At least, not in the proposed direction.
We Brexiteers might be loath to admit it, but in this area the EU
has generally pushed us towards economic literacy. Broad bases and
low tax rates are the goal. We shouldn’t be discriminating
between activities or products.

These new suggestions would complicate an already infuriatingly
daft system. The UK VAT exempts entirely sports activities, most
gambling and museums. It zero-rates most food, books,
children’s clothes and newspapers. A lower rate of 5pc is set
for energy, sanitary products and much more.

The estimated lost revenue of major reliefs alone stands at
£52bn, according to HMRC. That’s a …read more

Source: OP-EDS

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